Prediction: Only the first and second wave of XBRL filers will be required to perform "Detailed Tagging" of the notes to the financial statements.
After the Enron and Worldcom frauds, the US government reacted swiftly by enacting the Sarbanes-Oxley (SOX) legislation. Some business hated SOX, some loved it (the accounting and internal control professions come to mind, as well as a number of software companies), many hated it but stayed quiet and simply waited to see what would happen.
SOX required, among other things:
- Certification by CEOs and CFOs on the accuracy of financial statements (section 302).
- Certification of the effectiveness of the systems of internal control (section 404).
- A requirement that the SEC perform a detailed review of all filers not less than once every 3 years, and every year for companies meeting a set of criteria.
- The PCAOB, with the mandate to review the effectiveness of audits performed by accounting firms.
- Auditing standards making authority vested with the PCAOB.
Of the five requirements above, we know that four are fully implemented (1, 2, 4 and 5).
Number 2 however has only been required and actualized by "Accelerated filers", or those companies with a market cap of over $75 million. The costs of implementation Section 404 was estimated by the SEC at an average of $93,000 per company. The actual costs far exceeded that, with estimates in the multiple-millions of dollars per company. The howls of protest - not by those that implemented - resulted in an ongoing deferment for smaller SEC registrants.
In June 2008 the SEC announced another one year extension for small businesses. SEC Press Release
There are now moved to permanently remove the Section 404 requirement for small filers. Melissa Klein Aguilar in ComplianceWeek writes: "The House Financial Services Committee formally approved an amendment this morning to exempt small companies from Section 404(b) of Sarbanes-Oxley." See the ComplianceWeek article.
Link to Detailed Tagging:
The logical step to deferment or exception for detailed tagging is clear.
Tagging of financial statements into the XBRL format is not difficult, but it does take some time (the first time). After all, you have a number of line items (and tables), and a number of elements, and you map one to the other. Okay, it is not that simple, but fundamentally there is a clearly defined set of information that will need to be tagged, and that information is presented in such as way as to facilitate selection and tagging.
Detailed tagging of the notes to the financial statement is another issue entirely. The total effort required to accomplished detailed tagging of financial statements is not known. I have talked with a number of software provider who are also struggling with how they can streamline the detailed tagging of notes to the financial statements.
To perform the detailed tagging, each note and each paragraph within each note will need to be deconstructed. A set of sentences designed to convey a meaningful message is not the same as structured table or financial statement where each concept has its own line.
Certainly at least one company has already filed a "detailed tagged" version of their (Adobe), and they 1) have been providing XBRL to the SEC via the voluntary program since 2007 at least, and 2) have said that detailed tagging was "was extremely time-consuming."
Detailed tagging is a year-2 event. It will involved significant additional effort. The good news is that filers will have a 30 day grace period for thier first detailed tagged filing (see page 24 of the Final Rule).
So, filers will have significantly more work to accomplish, with the same time to accomplish it as they have for their first filing.
- Expect comparisons between XBRL detailed tagging and SOX 404 (justified or not).
- Expect companies in recession (or coming out of it) to have resource constraints.
- Expect howls of protest when the actual workload is understood (or feared).
- Expect a sympathetic SEC to defer detailed tagging for non-accelerated filers.
Implications for Assurance:
The best news is that the notes to the financial statement are not currently audited. Certainly they are reviewed (or "read") to determine if there is anything in the notes that contradicts or is incompatible with the financial statements, but they are not audited. This means that the level of sampling or assurance that will need to be performed over the detailed tagged notes is minimal, and a "read" may be sufficient - when, or course, assurance actually is required.